Tuesday, September 29, 2009

"Some US numbers have been bothering us for a while. If commercial property has dropped in value by something like 40% in the past two years, and if most of the financings of the past five years were tightly priced at higher values (as they were), then where are the bankruptcies that should be stirring up the financial waters? We have written before (September 3) about the long lag before commercial real estate problems become obvious because leases are renegotiated over many years, and our charitable view was that the lack of current problems was a function of this time-lag. However, the story of Tishman Speyer Properties LP and its investment in the Stuyvesant Town-Peter Cooper Village property in New York, the largest real estate transaction in US history, has woken us up. Its looming bankruptcy implies that the credit departments in the major banks were seeing more problems than were apparent to the average reader of the Wall Street Journal. An independent appraisal placed the value of this property at less than 40% of its purchase price. We remembered that the John Hancock Building, the premier office tower in Boston, was sold at less than 50% of its previous purchase earlier this year. So why aren’t there any rumblings in credit-land? It seems that the banks are not doing anything. “They don’t ask and we don’t tell them’” a leading property owner told us with a drink in his hand. He continued that almost all of his properties were in technical default, but that the banks wouldn’t want to press him on them. In fact he was in a powerful position as he could threaten to stop paying, forcing the bank to recognize the problem. As a result deals are being rewritten and problems are getting pushed out to the future. As a result, defaults are avoided and losses are deferred."